Understanding Grant Revenue for Nonprofits: A Practical Guide to Common Conditions and Restrictions

Accounting for grant revenue is one of the most important – and often misunderstood – areas of nonprofit accounting. On the surface, it feels simple: cash comes in, programs are delivered, and revenue is recognized. In reality, the timing and presentation of revenue depend on several important questions.

• When should the grant be recorded as revenue?
• Are there conditions the nonprofit must meet?
• How may the funds be used?

The answers impact more than your organization’s bookkeeping. They shape your financial reports, your compliance with grant requirements and your understanding of how much money is truly available to support your mission.

The Basis of Accounting

The Cash Basis of Accounting

Under the cash basis of accounting, grant revenue is recorded when cash is received. In other words, cash is deposited into the bank account, and grant revenue increases immediately. This happens regardless of any requirements attached to the grant. This simplicity is what makes cash basis appealing, especially for smaller organizations. It is easy to maintain in the accounting system, requires fewer internal resources, and provides a clear picture of available cash.

Cash-basis accounting shows how much cash the organization has received, but it does not necessarily show how much revenue it has earned or how much of that cash is available to spend. For example, a reimbursement-style grant may provide funds in advance that must be returned if the nonprofit does not meet the grant requirements. Without a corresponding refundable advance liability, the financial statements could overstate the resources available to the organization.

The Accrual Basis of Accounting

Under the accrual basis of accounting, grant revenue is recognized when the nonprofit is entitled to the funds, not necessarily when the cash is received.

The organization must first determine whether the grant is a contribution or an exchange transaction. This distinction is especially important for government grants and fee-for-service awards. If the grant is a contribution, the nonprofit must then answer two separate questions: Is the grant conditional or unconditional, and is it restricted or unrestricted?

Conditional or Unconditional

Whether a grant is conditional or unconditional determines when revenue is recognized.

A grant is generally unconditional when the nonprofit does not have to meet a specific requirement to earn the funding and is not required to return the money if a condition is unmet. Revenue is typically recognized when the grant is awarded or promised, even if the funds will be used in a future period.

A grant is conditional when the nonprofit must meet a specific requirement to earn the funding and may have to return the money or lose the right to receive it if that requirement is not met. Revenue is recognized only as the organization meets the grant’s conditions.

Restricted or Unrestricted

At the same time, nonprofits must evaluate whether funds are with donor restrictions (restricted) or without donor restrictions (unrestricted). Whether a grant is restricted or unrestricted determines how the revenue may be used and reported, not when it is recognized. Restricted funds must be used for a donor-specified purpose or within a specified period. Unrestricted funds may be used for the nonprofit’s general operations once the revenue is recognized.

Common Grant Examples

Conditions and restrictions work together. A grant can be unconditional but restricted, conditional and unrestricted, or any combination of these.

In practice, many common grant structures fall into the unconditional but restricted category.

Unconditional, Restricted Grants

Unconditional but restricted grants are recognized as revenue when awarded, even if the nonprofit will not receive or spend the money until a later period. If the grant is restricted, the organization must use the funds for the purpose or during the period identified by the funder.

The tricky part is that the revenue and related expenses may fall in different fiscal years. A common question is, “What if we won’t spend any of this money until next fiscal year? How should we consider it in our budget?”

Logically, this is a great question. The revenue may be reported in one fiscal year, while the related expenses are reported in the next. The restricted amount remains identified in net assets so leadership can see that the money is committed and not available for another purpose.

For example, assume a nonprofit receives an unconditional grant of $300,000 on June 30, 2025, that must be used for a specific program during the following fiscal year. Because the grant is unconditional, the nonprofit recognizes the full amount as revenue on June 30. Because the funds are restricted, the $300,000 is also reported as net assets with donor restrictions.

If the nonprofit has total net assets of $1 million on July 1, $300,000 is already designated for the grant-funded program. Only the remaining $700,000 is available without donor restrictions. Understanding this distinction helps leadership make informed budgeting and spending decisions.

Conditional Grants

There are some common types of conditional grants that many organizations encounter.

Cost Reimbursement Grant
Cost-reimbursement grants are particularly common in government funding. For example, many state and local government grants, including those we commonly see in Oregon, fall under this category. Under this type of grant, the nonprofit must incur allowable expenses and then request reimbursement from the grantor. Generally, with this type of grant, unused funds must be returned to the grantor. Two provisions often indicate that a grant is conditional:

• • A “maximum not-to-exceed” cap on the award amount.
  • A requirement to return unused funds, sometimes described as a “right of return” or “recovery of overpayments.”

If the agreement includes both provisions, the grant is likely conditional.

Matching Grant
Matching grants are another common example where a grantor agrees to contribute a certain amount only if the nonprofit raises matching funds from other sources. Until the nonprofit meets the matching requirement, it has not yet earned the funding. If the agreement provides for proportionate funding, revenue is recognized gradually as matching funds are raised. If the match is an all-or-nothing barrier, no revenue is recognized until the full threshold is met.

Accounting for Conditional Grants

When Grant Funds are Received Before Conditions are Met

When a nonprofit receives grant funds before meeting the grant’s conditions, it cannot recognize the money as revenue immediately. Instead, it records the funds as a liability called a refundable advance because the money may need to be returned if the conditions are not met.

For example, if a nonprofit receives $300,000 upfront for a reimbursement-style grant, the full amount is initially recorded as a refundable advance on the balance sheet, not in revenue. If the organization incurs $10,000 of eligible expenses in January, it recognizes $10,000 of revenue and reduces the liability by the same amount. The remaining amount stays on the balance sheet as a liability until the nonprofit incurs additional eligible expenses or meets other grant requirements. This way, revenue reflects the program activity rather than when the cash was received.

In QuickBooks Online, grant funds received before the conditions are met are generally recorded in a liability account, often called “Refundable Advance,” rather than as revenue. As the nonprofit meets the grant requirements, it reduces the liability and recognizes the corresponding revenue.

Many nonprofits review this activity monthly and use QuickBooks Online projects or classes to track the revenue and expenses associated with each grant.

When Funds are Not Received Before Conditions are Met

When a reimbursement-style grant does not provide funding in advance, the nonprofit generally recognizes revenue as it incurs eligible expenses. It also records a grant receivable for the amount it expects the funder to reimburse.

In reality, nonprofits typically do not recognize revenue every time they incur an eligible expense. Many nonprofits instead total the grant-related expenses at month-end and record one invoice for that amount.

As a result, the grant’s revenue and eligible expenses generally offset each other, provided the costs qualify for reimbursement and do not exceed the grant’s funding limit.

Conclusion

Grant accounting does not have to be overwhelming. By carefully reviewing each grant’s conditions and restrictions, nonprofit leaders can better understand when revenue should be recognized, whether funds may need to be returned and how much is available to support the organization’s work.

Need help accounting for grants or setting up QuickBooks Online to track them? Contact the Kernutt Stokes Client Accounting Services team.